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E-MailThis post comes to us from Paul Fischer of Pennsylvania State University, Jeffrey Gramlich of the University of Southern Maine and Copenhagen Business School, Brian Miller of Indiana University, and Hal White of the University of Michigan.
In our forthcoming Journal of Accounting and Economics paper Investor Perceptions of Board Performance: Evidence from Uncontested Director Elections, we investigate whether uncontested elections serve as meaningful polls reflecting investor perceptions of board performance. Our paper is motivated in part by the general perception that many director elections are meaningless charades of shareholder democracy due to the lack of contested elections, coupled with the widespread use of plurality voting rules.
We construct approval measures using director vote tallies for a sample of S&P 500 firms from 2000-2004, and find evidence consistent with these measures reflecting investor perceptions of board performance. In particular, we examine the relation between the approval measures and the stock price response to a change in the most focal member of the board, the CEO. We find that higher (lower) approval is associated with lower (higher) stock price reactions to subsequent announcements of management turnovers. We also show that the approval measures predict uncertain future events expected to be associated with board performance. Specifically, we find that firms with low board approval are associated with a higher likelihood of CEO turnover, greater board turnover, lower CEO compensation, fewer and better received acquisitions, and more and better received divestitures subsequent to the vote.
We also assess whether the approval measures are incrementally informative to traditional metrics of board performance, such as stock returns and return on assets. In particular, we find that the information content in the vote approval measures is largely unaffected by the inclusion of controls for traditional metrics of board performance. Hence, the vote approval metrics are uniquely meaningful measures of board performance. As such, our approval measures can be used to complement existing governance measures, such as the Gompers, Ishii, and Metrick (2003) index, which focus primarily on governance structures as opposed to the performance of the individuals operating within those structures. Overall, our findings suggest uncontested votes do reflect investor perceptions in spite of a number of countervailing forces, including the lack of diligent voting by all shareholders.
The full paper is available for download here.
